From the Law Office of Ronald H. Gitter, Esq.

Tuesday, October 04, 2011

A Matter of Trust

Thinking Ahead

For estate planning and privacy reasons, it often makes sense to hold the shares of a co-op or to take title to a condo in the name of the trust. Since most condo governing documents permit ownership by a trust and by a variety of other entities, purchasing the condo unit in the name of a trust or transferring the apartment to a trust thereafter is not a big deal. As is usually the case, things are more complicated with a co-op.

Things Have Changed

In the early days, most co-ops did not permit ownership of cooperative shares by a trust, and today, still prohibit ownership by business entities. The concern was primarily over the financial wherewithal of the trust entity that would be holding title to the shares. Over time, co-op boards realized that trust ownership, under certain circumstances, would not create an undue burden on the co-op provided that certain steps were taken to protect the co-op's interests. Even today, not all co-ops permit trust ownership of shares, but many do. In most cases, however, the shares are initially purchased by the co-op owner, individually, and transferred to the trust after a period of time. Although the purchase of shares directly into a trust avoids the necessity of additional paperwork and an additional closing in some cases, it is a rare occurrence.

What do the Co-op Governing Documents Say?

Before going too far down the road, a look at the governing co-op documents (that is, the by-laws and proprietary lease) should disclose whether trust ownership is permitted. If you're still unsure, check with the managing agent. Expect to incur costs in order to accomplish a transfer as the co-op or condo will have to get its counsel involved to prepare documents. Assuming trust ownership is permitted, here are a few concepts to keep in mind when considering a transfer to a trust.

The Mechanics of Trust Ownership

Although there are various types of trusts that can hold co-op shares, for our purposes, it usually comes down to either an “irrevocable” trust or a “revocable” trust. Technically, the shares are actually held by the “trustee “of the trust, but title to the property is always described as being “owned” by the trust. Once the shares are donated by the “grantor” or creator of the trust to an irrevocable trust, the grantor of the trust no longer owns the shares and gives up complete control over the ownership and disposition of the shares. The trust provisions can’t be changed and the shares will be disposed of as provided in the trust agreement (subject to Board approval as discussed below). When an irrevocable trust is used, the grantor’s intention is to exclude the shares from his or her gross estate, so a gift to the trust may accomplish that goal. In other situations, however, the revocable trust is used to hold the shares as the grantor continues to be the beneficial owner of the shares and can hold or transfer the shares as he or she sees fit. There is no loss of control and maximum flexibility, but there is no estate tax savings from using this type of trust.

Privacy Matters

The revocable trust vehicle works particularly well for folks with privacy concerns, if a designated trustee is unconnected to the grantor by name or position. That being said, since shares are usually acquired individually at first, the identity detectives who search ACRIS will be able to determine who originally owned the stock. Nevertheless, on a day-to-day ownership basis, privacy is significantly increased by ownership by an unidentifiable party who acts as trustee. Since the revocable trust agreement can provide for change of trustee as the grantor determines, the trustee of a revocable trust serves at the pleasure of the grantor and the grantor can control who undertakes that role.

A Word About Condos

As mentioned, most condo governing documents permit ownership by a trust. That being said, condos can require a personal guaranty by the grantor of the trust or a security deposit to cover future common charges. Still, the process with condos is considerably easier. There are also title issues to be considered, as the original title policy, in most cases, will no longer be effective if the property is transferred to a trust, even though it is an affiliated entity.

What to Expect From the Co-op

When the co-op permits trust ownership, the co-op will prepare a standard set of documents which usually include the following:

--an agreement on the part of the trustee of the trust, among other things, that prohibits any material changes to the trust as well as requires Board approval for any subsequent transfer;

--a personal guaranty of the trust’s financial obligations to the co-op by the grantor of the trust; and

--an “occupancy” agreement by which the grantor of the trust designates the parties who will reside in the apartment, including the grantor’s spouse and immediate family.

Documents might vary from co-op to co-op, but the point of the paperwork is to insure that the monetary obligations of the co-op will be paid and that all future transfers will be subject to Board approval. For the most part, the documentation is “boilerplate” and the co-op owner who is eager to fulfill an estate plan or who needs greater privacy, signs the required documents without much negotiation. The co-op owner will also reimburse the cooperative for legal costs incurred for preparing the documents and for charges from the managing agent if a closing is required to complete the process.

When there is an Outstanding Co-op Loan

If the shares are owned free and clear of any financing, the process for transferring the shares to a trust doesn’t require much action other than satisfying the co-op’s requirements. Things can get complicated if the co-op shares have been pledged to a bank in connection with a loan. Since the bank holds the stock certificate and proprietary lease as collateral, if the co-op owner wants to transfer the shares, subject to the existing co-op loan, the bank must consent to the transfer and show up with the stock and lease in order to complete the transfer process. When that happens, the original loan documents will be revised to reflect ownership of the stock and lease by the trustee, but liability for the indebtedness will remain the obligations of the grantor.

More Hoops and Hurdles

Getting the bank’s timely cooperation in connection with a proposed transfer depends on the bank and cooperation can vary significantly. In one recent transfer request, the bank literally took months to go through the trust agreement and to locate the stock and lease. Once the bank had finally agreed to the transfer, the bank’s counsel raised issues about an obscure provision of the trust and wanted certain language changed or removed. Finally, the exasperated client couldn’t take any further delays and decided to just pay off the loan and get the bank out of the picture. Not every lender’s back office is as disorganized as this large bank, but expect a low level obstacle course when the lender is agreeable to allowing a transfer to a trust.

What About Condo Liens?

If the condo unit is subject to a mortgage lien, theoretically, the bank’s consent should be obtained before a transfer to a trust is completed. Since the unit owner could simply record a deed from the unit owner to the trust, subject to the existing lien, it is possible to complete the process without obtaining the bank’s formal consent. As the mortgage documents undoubtedly provide that any transfer will require the bank’s consent or will result in the acceleration of the payment of the entire outstanding indebtedness, transferring the condo to trust without the bank’s consent has serious risks and should not be done without review of the particular facts of the situation by the unit’s owner’s attorney.

Residential Reality: Trust Ownership Works

Under the right circumstances, ownership by a trust often facilitates estate planning and can shield high profile owners from the prying eyes of the public when the designated trustee protects the identity of the grantor. Trusts can be formed for many reasons, the ownership of real estate being one of them. Consulting you estate planning professionals is essential for a deeper understanding of whether trust ownership is appropriate before considering any property transfer for such purposes.

Note to Readers: My thanks to estate lawyer, James Kelly, a partner at Davidson, Dawson & Clark LLP, who assisted in the preparation of this article.

Simplifying the complexities of Cooperative and Condominium transactions in New York City

Asked and Answered

I don’t smoke, but the smell of smoke is wafting into my apartment from my neighbor. Is there anything that can be done to remedy this condition?

My mortgage lender has informed me that the cooperative in which I am purchasing an apartment has inadequate insurance coverage and has requested that the co-op increase its coverage to meet the bank’s new minimum requirements. Can the bank withdraw its underwriting due to a lack of insurance coverage by the co-op?

A co-op owner asks: I have found that maintenance is usually higher in coops than in condos because of the contribution by the shareholders to the building's underlying mortgage payments. In condos, the unit owners only pay for real estate taxes and common charges for common areas. Will the monthly maintenance be reduced after the underlying mortgage has been fully amortized?

We just submitted the Board package and we realize that we neglected to disclose a lawsuit against my husband’s company, in which my husband is named as a defendant? The lawsuit is covered by insurance and my husband is indemnified from liability by his employer. Should we notify the managing agent and amend the purchase application?

We are negotiating the contract and we just found out that there is a substantial assessment that will go into effect the month that we close on the purchase. Should the assessment be deducted from the purchase price at closing?

I am buying an apartment in a small building and I just found out that the elevator is being renovated and will be out of service for three months. Do I have to close if the elevators will not be operational on the closing date?

My husband and I own a co-op and we would like to transfer the shares to an irrevocable trust that we recently created for estate planning purposes. Will our cooperative allow us to make that transfer?

My boyfriend and I are interested in buying our first apartment in a new construction condominium. Our mortgage broker tells us we should qualify for a 90% loan, but it will be a close call for the bank. The sponsor wants us to sign a “no contingency” contract. Is that a good idea?

We are considering a condo purchase in a new development that is only 25 percent sold. There is a bank that has approved the project and will make the loan, but should we be concerned about the number of units that the sponsor still has to sell?

We are buying an apartment that has been extensively renovated. Among other things, the size of the master bath was significantly increased. Can we rely on a representation in the contract that all required approvals were obtained from both the Cooperative Corporation and from the New York City Department of Buildings?

We received a draft of the contract of sale for the cooperative apartment we are buying and our social security numbers are on the front page! Our attorney told us that we will have to provide our identification numbers to the managing agent for a credit check as a part of the Board package, so it’s not a big deal. Do we have to list our socials on the contract?

I am considering an apartment in a new construction condominium. There is park under development by New York City that will greatly enhance the value of the condominium when it’s completed. Although the sponsor’s salesperson indicated that the first phase of the park will be completed in the next year or so, the Offering Plan contains a “Special Risk” that states that the sponsor gives no assurance as to when, if ever, the park will be completed. Who and what should I believe?

We are in negotiations to purchase a co-op apartment on the Upper East Side. Our lawyer reviewed the minutes and discovered that the building has a bedbug infestation. Should we go forward with our purchase?

At my closing, I had to reimburse the Seller for his New York State “STAR” rebate that appeared on the maintenance statement for the month following the Closing. What exactly is the STAR rebate and will I be able to obtain the rebate as well?

I just found out that the seller will be unable to close for an additional two weeks. As a result, I will have to extend my rate lock, at a cost of $1,200.00. Is the seller obligated to reimburse this cost?

We are selling our apartment to our neighbor, but our neighbor can’t afford to purchase our apartment unless she sells her apartment. Her lawyer wants the contract to provide that the purchase of our apartment is contingent upon the sale of her apartment. Our lawyer is advising us against including a provision that makes the transaction contingent on the sale of the buyer’s apartment. Should we go along with the contingency?

We are selling our co-op and the buyer is not obtaining a mortgage in connection with the purchase. The contract required the Board package to be submitted within 10 business days after the fully-executed contract was returned to the buyer. The buyer is two weeks late in submitting the package. Is the buyer in default?

I’m selling my condo and I have not been able to pay my common charges for the past six months (I lost my job). I have a buyer for the apartment, but the Board of Managers will not release the Waiver of the Right of First Refusal, unless I pay the outstanding balance of the common charges. I’m between a rock and a hard place, as I don’t have the money. What should I do?

I am combining two adjacent apartments that I own and I want the co-op to issue one stock certificate for both apartments. There is an outstanding UCC lien against one of the apartments. The other apartment is owned free of any liens. Can the co-op object to the combination?

My attorney asked me to contact the managing agent to verify the maintenance and assessment information that's disclosed in the contract for the apartment I intend to purchase. Isn't that my attorney's job?

Our application to purchase a co-op was turned down by the Board without an interview. Although our attorney asked the managing agent to disclose the reasons for the Board’s decision, none were given. Can the Board just turn our application down without any explanation?

I am buying a co-op in Manhattan. The managing agent is located in Brooklyn and refuses to send a closing representative to the attorney’s office for the buyer or seller located in Manhattan. Will everyone have to go to Brooklyn for the closing?

We are purchasing a condo that was occupied by a tenant at the time the contract was executed. We just did the walk through and there is damage to a portion of the floor that was hidden by the tenant’s furniture. Are we entitled to a repair credit at Closing?

A loan commitment was issued, but the bank requested an explanation for a $14.00 missed credit card payment that occurred nine years ago. Could the bank withdraw its commitment as a result of this missed payment?

A leaking pipe inside the wall of my co-op was recently replaced. The following month, my maintenance account was charged $1,000.00 on the theory that the pipe only serviced my apartment. Am I responsible for this repair?

We submitted our Board package a month ago, but the Board has not scheduled an interview or asked for any additional information. To make matters worse, the managing agent won’t give us any indication as to what’s going on. Is there anything we can do?